(CN) - Investors who bought Facebook shares after its $16 billion initial public offering lack standing to challenge alleged pre-IPO misrepresentations, a federal judge ruled.
When Facebook held its IPO on May 18, 2012, it offered 421 million shares at $38 per share, valuing the company at more than $16 billion.
The very next day, Reuters reported that Facebook had "altered its guidance for research earnings last week, during the road show, a rare and disruptive move."
It revealed a few days later that Morgan Stanley, JPMorgan and Goldman Sachs had cut their earnings estimates for Facebook before the IPO, but said the company had notified only a few preferred investors of the reduced forecast.
On this news, Facebook shares fell 18.42 percent to $31 per share, and it faced various shareholder class actions, raising both state and federal claims against the adequacy of Facebook's pre-IPO disclosures. U.S. District Judge Robert Sweet now presides over the consolidated multidistrict litigation in the Southern District of New York.
On Wednesday, he dismissed four separate derivative actions brought by Edward Childs, Lidia Levy, William Cole and Hal Hubuschman, finding that they do not have standing because they purchased their shares on the day of the IPO.
"Federal and Delaware courts have repeatedly held that even plaintiffs who acquire shares during an IPO are not permitted to bring derivative actions based on allegedly wrongful conduct that took place before they acquired their shares," Sweet wrote.
The plaintiffs also cannot rely on the "continuing wrong" exception because "this circuit does not appear to recognize the doctrine and has explicitly rejected the 'expansive definition of the term 'transaction' that is inherent to the continuing wrong doctrine,'" according to the ruling.
Even if the plaintiffs did have standing, Sweet said their complaint still did not allege "particularized facts that support an inference that the board possessed information that was materially different from what existed in the marketplace."
In a separate ruling, Sweet refused to let a New York state court resolve negligence claims Michael Zack has brought against the NASDAQ.
Zack placed an order for 260 Facebook shares at 10:55 a.m. the morning of the IPO, then canceled the order at 11:38 a.m., but NASDAQ executed his order anyway at 1:05 p.m. because of alleged system issues.
Although Zack's lawsuit makes claims only under New York state law, Sweet ruled it is subject to the Grable exception.
In Grable & Sons Metal Products, Inc. v. Darue Engineering & Manufacturing, the Supreme Court found that a federal court has jurisdiction when a case involves "a state-law claim [that] necessarily raise[s] a stated federal issue, actually disputed and substantial, which a federal forum may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities."
Sweet ruled that "an inquiry as to whether NASDAQ's conduct in connection with the Facebook IPO was or was not consistent with the duties imposed upon NASDAQ as a national securities exchange registered under the Exchange Act, the rules and regulations promulgated by the SEC under the Exchange Act, and NASDAQ's own rules require a vastly more significant federal interest."
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